Income Tax on Startups in India & Tax Incentives to Start-ups

Several incentives were announced by the Govt in Budget 2016 regarding the levy of Income Tax on Start-ups in India. These incentives were further enhanced in Budget 2017. All these incentives and all other relevant points regarding Income on Startups in India have been mentioned in this article.

The following things about Income Tax on Start-ups have been discussed in this article:-

Manner of Computation of Income

Income Tax on Start-ups

Tax Incentives

Manner of Computation of Income

As the name suggests, Income Tax is always levied on Income and not on the Sales Revenue. The difference between Income and Revenue is mentioned below

If the Income Tax was levied on the Total Revenue, then the Total Tax Liability would have been much higher as compared to Income Tax which is computed on Income. As Income Tax is always levied on the Total Revenue, it will reduces the total tax liability.

For early stage start-ups, it sometimes gets very difficult to keep a track of all the Sales, Expenses, Depreciation and also keep invoices of all these. Therefore, to simplify the manner of computation of Income, the Govt has also introduced the Presumptive Scheme of Taxation wherein a person can disclose his Income as below:-

Income = 50% of Value of Services provided (applicable for Professionals)

Income Tax on Start-ups

After computing the Income as per any of the above mentioned 2 methods, the next step is to compute the Tax liability. Income Tax is levied on the Income as per the below mentioned schedule of Taxes

Schedule of Income Tax Rates

Type of Business Entity

Income Tax applicable

Proprietorship/ Individual

As per Income Tax Slab Rates

Partnership/ LLP Firm

30% of Income

Indian Company

25% of Income

The last date for filing of Income Tax Return is 31st July/ 30th Sept and the ITR is to be filed in the below mentioned forms

Manner of Computation of Income

ITR Form applicable

Income computed under Presumptive Taxation

ITR 4

Income computed as Revenue – Expense – Depreciation

ITR 3/ ITR 5/ ITR 6/ ITR 7

Tax Incentives for Start-ups

The Govt while announcing the Budget 2016 also announced 100% Tax Deduction under Section 80-IAC for eligible Start-ups from payment of Income Tax. Eligible start-ups formed on or after 1st April 2016 and before 1st April 2019 can claim 100% Tax Exemption from payment of any Income Tax for any 3 consecutive years.

These 3 consecutive years for which 100% tax exemption is allowed can be chosen by the start-up at its own discretion from any of the first 7 years. (Amendment introduced vide Finance Act 2017).

All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-

Maintain Separate Books of Accounts for Eligible Business

Get their Accounts audited by a Chartered Accountant

Furnish Audit Report in Form 10CCB along with ITR

Meaning of eligible Start-ups

The benefits of 100% Tax Deduction are not allowed to all start-ups but are only allowed to eligible start-ups. Only the start-ups which satisfy all the following mentioned criteria’s are considered as eligible start-up.

Incorporated as a Company or LLP

Incorporated between 1st April 2016 and 1st April 2019

Total turnover of the business does not exceed Rs. 25 Crores

Certified by the Inter-Ministerial Board of Certification in respect of Eligible Business i.e. it is a business which involves innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

Should not be formed by splitting up or Reconstruction of a business already in existence.